EDWARD J. COLEMAN, III, Bankruptcy Judge.
Before the Court is debtor Shree Meldikrupa Incorporated's ("Debtor") Amended Motion For Order to Use Cash Collateral ("Amended Cash Collateral Motion") (dckt. 64)
The objections of Hinesville and Georgia Lottery have been resolved by consent orders. Hinesville, which holds a first in priority lien in the Debtor's real estate, and possibly other collateral as will be addressed in this opinion, will receive its regular monthly payments that become due under its security deed and note with the Debtor. (Dckt. 60). Georgia Lottery will be able to continue to collect all proceeds from the Debtor's sale of lottery tickets under the terms of the contract between the Debtor and Georgia Lottery. (Dckt. 61).
Cornerstone, the remaining objecting creditor, holds a second in priority lien in the Debtor's real estate and claims a security interest in other collateral, including cash collateral. While Cornerstone's security agreement includes language granting a security interest in the Debtor's personal property, including inventory and its proceeds, Cornerstone failed to file a UCC-1 financing statement. Accordingly, Cornerstone holds an unperfected security interest in such property. For the reasons set forth below, the Debtor's Amended Cash Collateral Motion is GRANTED.
This Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(K) and (M). In accordance with Bankruptcy Rule 7052, the Court makes the following findings of fact and conclusions of law.
On August 31, 2015, the Debtor filed a Chapter 11 petition for bankruptcy relief. (Dckt. 1). According to its Schedules, the Debtor's two principal creditors are Hinesville and Cornerstone. Hinesville has filed a proof of claim in the amount of $340,669.81, claiming a first priority lien in the Property and a security interest in other personal property of the Debtor. (Claims Register 2-1). Cornerstone has filed a proof of claim in the amount of $220,116.80, claiming a second priority lien in the Property and also claiming a security interest in the Debtor's personal property. (Claims Register 4-2).
On July 28, 2006, the Debtor executed a note in favor of The Coastal Bank in the amount of $450,000 ("HLP Note") in order to purchase the Property. (Claims Register 2-1, p. 8). To secure the loan, the Debtor executed a Real Estate Deed to Secure Debt ("HLP Security Deed") which gave The Coastal Bank a valid first lien on the Property. Id. at p. 10. The HLP Security Deed was recorded in the real property records of Liberty County, Georgia. The Coastal Bank was further secured by certain personal property described in the HLP Security Deed. Clause 28 of the HLP Security Deed provides in pertinent part:
(Claims Register 2-1 at p. 15). On August 1, 2006, Coastal Bank filed a UCC-1 Financing Statement that listed its collateral as "all furniture, fixtures and equipment now owned or hereafter acquired and located at [the Property.]" Id. at p. 19.
On November 22, 2013, The Coastal Bank assigned its interest in the HLP Security Deed and the HLP Note to Hinesville. Id. at p. 33. On July 21, 2014, Hinesville filed an amended UCC-1 Financing Statement reflecting the assignment. Id. at p. 41. Hinesville's amended UCC-1 did not indicate any changes to the collateral described in Coastal Bank's original UCC-1. Id.
On September 5, 2013, Shree Meldishakti, Inc., a company affiliated with the Debtor, executed a promissory note in favor of Cornerstone in the principal amount of $207,000.00 ("Cornerstone Note"). (Dckt. 17). In order to secure payment of the Cornerstone Note, the Debtor executed a Deed to Secure Debt and Security Agreement ("Cornerstone Security Deed") and an Assignment of Leases and Rents ("Assignment of Rents"). (Claims Register 4-2, Exhibits 4 and 5). The Cornerstone Security Deed evidences a second in priority security interest in the Property and other personal property of the Debtor. (Dckt. 17). The description of the collateral in the Cornerstone Security Deed is stated in the broadest terms and includes, "inventory . . . including all . . . proceeds from a permitted sale of [the inventory]." (Dckt. 17, p. 6). With regard to the Debtor's personal property, in addition to the description of collateral in its introductory paragraphs, the Cornerstone Security Deed provides in pertinent part:
Id. at p. 13. Section 1.09 further provides that all security interests "automatically attach, without further act, to all after-acquired property attached to and/or used in the operation of the [Property] or any part thereof." Id. at p. 14. In the separately recorded Assignment of Rents, the Debtor provided as additional security for the loan and assignment of rents as follows: "[the Debtor] assigns, all of [the Debtor's] right, title and interest in, to and under any and all of those leases and rental agreements now existing and hereafter made . . . which cover or shall cover portions of [the Debtor's Property] . . . together with all of [the Debtor's] right, title and interest in and to all rents, issues and profits from the [leases and rental agreements] and from [the Debtor's Property]." Cornerstone recorded the Cornerstone Security Deed and Assignment of Rents in the real property records of Liberty County, Georgia, but did not file a UCC-1 Financing Statement.
On September 17, 2015, Cornerstone filed a motion to prohibit the Debtor's use of cash collateral
On October 15, 2015, six weeks after this case was filed, the Debtor filed its Motion for Order to Use Cash Collateral Pursuant to 11 U.S.C. § 363 and Providing Adequate Protection ("Original Cash Collateral Motion") (dckt. 27). Two parties, Hinesville and the Georgia Lottery Corporation, filed objections to the proposed use of cash collateral and adequate protection payments. Hinesville's objection
On October 27, 2015, this Court held a hearing on Cornerstone's Motion to Prohibit, the Debtor's Original Cash Collateral Motion, and the related objections of Hinesville and the Georgia Lottery Corporation
Because the parties were not in agreement as to the terms of the Debtor's proposed cash collateral order, the Debtor, through its agent Rajankumar Patel
On December 4, 2015, the Debtor filed the instant Amended Cash Collateral Motion and attached certain financial information in the form of a proposed budget detailing the Debtor's average monthly income, costs of goods sold and expenses. (Dckt. 64). On December 18, 2015, the Court held a hearing on the Debtor's Amended Cash Collateral Motion. At this hearing, the Debtor presented additional evidence of the Debtor's current financial situation and its need to use cash collateral. In addition, the Debtor argued for the first time that Cornerstone failed to properly perfect its security interest in the Debtor's personal property, and thus does not have an interest in the Debtor's property that constitutes cash collateral within the definition of 11 U.S.C. § 363(a)
Pursuant to 11 U.S.C. § 363(c)(1), a debtor-in-possession
As a general rule, post-petition revenue is not cash collateral. In re Premier Golf Properties, LP, 477 B.R. 767, 772 (B.A.P. 9th Cir. 2012). Under § 522(a), a creditor's pre-petition security interest does not extend to property acquired by the debtor post-petition even if there is an "after-acquired" clause in the security agreement. 11 U.S.C. § 522(a). The purpose of § 522(a) is "to allow a debtor to gather into the estate as much money as possible to satisfy the claims of all creditors." Premier Golf, 477 B.R. at 771 (citation omitted).
However, § 552(b) provides an exception to this rule. Section 552(b)(1) allows a pre-petition security interest to extend to post-petition property if the pre-petition security agreement creates a security interest in pre-petition property and its "proceeds, product, offspring, or profits" and the post-petition property constitutes such "proceeds, product, offspring or profits." 11 U.S.C. § 552(b)(1); In re Cafeteria Operators, L.P., 299 B.R. 400, 405 (Bankr.N.D.Tex.2003). Additionally, § 552(b)(2) provides similar treatment for "amounts paid as rents of such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties." 11 U.S.C. § 552(b)(2); Premier Golf, 477 B.R. at 772. Read together, the provisions of § 363(c)(2) and § 552(b) protect a creditor's collateral from being used by a debtor post-petition if the creditor's security interest extends to one of the categories set out in § 552(b). Id. Put another way, a creditor is not entitled to the protections of §§ 363(c)(2) and 363(e) unless its security interest satisfies § 552(b). Cornerstone has the burden of establishing the existence and the extent of its interest in the property it claims as cash collateral. 11 U.S.C. § 363(p)(2); In re Las Vegas Monorail Co., 429 B.R. 317, 328 (Bankr.D.Nev.2010).
The Debtor generates revenue from the sale of its inventory of gasoline and convenience store items (including beer, cigarettes and lottery tickets). By its terms, Cornerstone's security agreement extends to the Debtor's inventory and the proceeds from the sale of that inventory that existed on the petition date. Because Cornerstone's security interest extends to the Debtor's pre-petition inventory and proceeds, its security interest would therefore, pursuant to § 552(b)(1), extend to the post-petition proceeds of such pre-petition inventory. Accordingly, such post-petition proceeds would constitute "the proceeds. . . of property . . . subject to a security interest as provided in section 552(b)," and thus be the type of property defined as cash collateral within § 363(a). 11 U.S.C. § 363(a).
Based on its security agreement, Cornerstone argues that because it has a § 552(b) security interest in the Debtor's post-petition proceeds generated from the sale of the Debtor's pre-petition inventory, such proceeds are cash collateral. As discussed below, where the "interest" within the meaning of §363(a) is a security interest, it must be a perfected security interest for the proceeds to constitute cash collateral.
A predicate for the existence of "cash collateral" under 11 U.S.C. § 363(a) is that a creditor be "an entity [with] an interest" in the collateral. The Code, however, does not provide a definition of what it means to have such "an interest." One commentator has suggested that the language in § 363(a) is intentionally broad to deal with situations in which an entity has an interest, other than a security interest, in the cash or cash equivalents. 3 Collier on Bankruptcy 363.03[3], p. 363-29 (16th ed. 2013). For example, a bank with a right of setoff is treated as an entity with an interest in cash collateral notwithstanding that it does not have a security interest. See National Bank of Ga. v. Air Atlanta, Inc. (In re Air Atlantic, Inc., 74 B.R. 426 (Bankr. N.D. Ga. 1987). When dealing with security interests, however, most courts
In reaching this conclusion, several of these courts appear to reason that the concept of "cash collateral" implies that a creditor has an enforceable security interest that could not be avoided by the debtor pursuant to 11 U.S.C § 544. Wright Group, 443 B.R. at 806 ("Absent a perfected security interest, the creditor's interest is avoidable by the debtor utilizing avoidance powers in Chapter 5 of the Bankruptcy Code, and the issue of cash collateral becomes moot."); See In the Matter of Wheaton Oaks Office Partners Ltd. Partnership, 27 F.3d 1234, 1244 (7th Cir. 1994) ("even if a party has a security interest under § 552(b), this same provision requires pre-petition security interests to survive the rigors of the trustee's "strong arm" powers under § 544 before they can reach cash collateral status"); In re Chama, 265 B.R. 662, 669 (Bankr. D. Del. 2000) (finding that a creditor whose security interest was avoided pursuant to 11 U.S.C. § 544 became a general unsecured creditor, and thus was not entitled to any adequate protection). Under § 544, a debtor-in-possession may avoid a security interest in the debtor's property when such security interest has not be perfected under applicable state law. In re Chama, 265 B.R. at 668. Accordingly, Cornerstone must have properly perfected its security interest in the Debtor's inventory and its proceeds to have an interest in the cash collateral as defined in § 363.
Absent a contrary federal statute, the acquisition and maintenance of security interests in a bankruptcy debtor's estate are determined by state law. See Butner v. United States, 440 U.S. 48 (1979). In this case, it is undisputed that the laws of the State of Georgia control the creation and perfection of Cornerstone's security interests. For claims governed by Georgia law, Article 9 of the Uniform Commercial Code ("Article 9") as enacted in Georgia, O.C.G.A. §§ 11-9-101 to 11-9-809 ("Georgia's Article 9"), outlines much of the law governing secured transaction, but it does not govern all security interests. In particular, Georgia's Article 9 does not apply to "the creation or transfer of an interest in or lien on real property, including a lease or usufruct or rents thereunder . . ." O.C.G.A. § 11-9-109(d)(11). Otherwise, Georgia's Article 9 governs "[any] transaction, regardless of form, that creates a security interest in personal property or fixtures by contract." O.C.G.A. § 11-9-109(a)(1).
The preliminary judicial inquiry into the validity of a security interest addresses two questions: has a security interest been created, and if so, has it been perfected. For security interests governed by Article 9, three conditions must be met before they may be enforceable against anyone, including the debtor. O.C.G.A. § 11-9-203. First, unless the secured party possesses the collateral, there must be a written security agreement signed by the debtor and containing a description of the collateral. Second, the secured party must have given value. And third, the debtor must have "rights in the collateral." O.C.G.A. § 11-9-109(b). These three elements have been met and Cornerstone's security interest in the Debtor's inventory and its proceeds
Although it is attachment that gives a secured party property rights in the collateral enforceable against the debtor, it is perfection that gives the secured party rights against conflicting claims of third parties. Where a security interest is governed by Article 9, perfection generally requires the proper filing of a financing statement. See O.C.G.A. § 11-9-310(a). The proper place to file a financing statement in order to perfect a security interest for Article 9 collateral is "[t]he office of the clerk of the superior court of any county of [Georgia]." O.C.G.A. § 11-9-501(a)(2). For security interests that fall outside the scope of Georgia's Article 9 by virtue of "the creation or transfer of an interest in or lien on real property, including a lease or usufruct or rents thereunder," a financing statement is not required. However, the secured party must still record such security interest with the clerk of the court in the county where the real property lies. O.C.G.A. § 44-14-63.
Cornerstone contends its interest in the cash collateral is a product of its security interest in "all income, rents, issues, profits, and revenues of the [Property]" as set forth in the Cornerstone Security Deed. (Dckt. 17, p. 6). In addition, Cornerstone contends that its Assignment of Rents also creates a security interest in "all rents, issues, and profits from [leases] and from the [Property]." (Claims Register 4-2, Exhibit 5). Accordingly, it is Cornerstone's contention that its security interest in the Debtor's inventory and any proceeds therefrom are a product of the Debtor's use of the real property, and thus perfection of a security interest in such property falls within the real property exception of Georgia's Article 9.
In support of its position, Cornerstone relies on two cases from this District involving revenues generated from certain real property interests. In the Matter of Chatham Parkway Self Storage, LLC, 2013 WL 1898058 (Bankr. S.D. Ga. 2013); In the Matter of Resort Inns, Inc. d/b/a Ocean Plaza Beach Resort, 2004 WL 2201252 (Bankr. S.D. Ga. 2004). Cornerstone's reliance on theses cases is misplaced. The Debtor has no rents or revenues from real property.
In Chatham Parkway, the debtor operated a self-storage facility that generated revenue from the rental of storage units, and the creditor claimed a security interest in all of such leases and the proceeds therefrom. The Court held that the creditor properly perfected its security interest in the revenue from the leases because it recorded the applicable security deed and assignment of rents in the appropriate real property records. In Resort Inns, the debtor operated a hotel which generated its revenues from the rental of its hotel rooms, and the creditor claimed a security interest in such revenues. Again, the court held that the creditor held a perfected interest because it filed the security agreement and assignment of rents in the appropriate real property records.
In these cases, the court was correct in finding such interests were properly perfected pursuant to real property law because "the creation . . . of an interest in . . . real property, including a lease . . . or rents thereunder" are expressly exempted from Georgia's Article 9. Therefore, such security interests may be properly perfected by filing the appropriate documents in the appropriate real property records. In the case at hand, however, the Debtor does not receive any revenue from the creation and assignment of a real property interest. Instead, as previously mentioned, the Debtor's revenue comes solely from the sale of its inventory, which constitutes personal property. Therefore, in order to perfect an interest in such personal property, Cornerstone must comply with the rules of perfection in Georgia's Article 9.
It is undisputed that the Cornerstone Security Deed grants Cornerstone a security interest certain personal property, including the Debtor's inventory and its proceeds. As explained above, Georgia's Article 9 requires the proper filing of a financing statement in order to perfect an interest in personal property. See O.C.G.A. § 11-9-310(a). Cornerstone does not dispute that a UCC-1 financing statement indicating its security interest in any of the Debtor's personal property has not been filed. Therefore, Cornerstone holds an unperfected security interest in the Debtor's personal property, including the Debtor's inventory and its proceeds, and thus Cornerstone is not "an entity [with] an interest" in cash collateral within the meaning of § 363(a), (c) and (e).
Cash collateral, by definition, requires that "the estate and an entity other than the estate have an interest" in such collateral. 11 U.S.C. § 363(a); See 11 U.S.C § 363(c)(2). Otherwise, there is no restriction on the debtor's use of such property of the estate in the ordinary course of its business. See 11 U.S.C. § 363(e). The Court holds that Cornerstone's unperfected security interest is not such an interest that meets the definition of cash collateral. Accordingly, the Court need not prohibit or condition the Debtor's use of that property in a manner that provides "adequate protection of such interest" to Cornerstone. 11 U.S.C. § 363(e). The Court will enter an order GRANTING the Debtor authorization to use its cash collateral in the ordinary course of its business without providing any further adequate protection to Cornerstone. The Court will enter a separate order consistent with the foregoing Findings of Fact and Conclusions of Law.
